When it comes to planning for retirement, nothing works better than investing in the Public Provident Fund (PPF). The interest rate on PPF for this quarter ending on June 30, 2022, is 7.1 per cent compounded on an annual basis. The contributions to this investment option are tax-exempt under Section 80C of the Income Tax Act. The maturity proceeds are also tax-free, thus, making it a viable investment option.
While everything seems good about PPF, some investors are apprehensive owing to its 15-year lock-in period. However, this is like most other financial instruments where time is an essential factor in helping to compound returns and create wealth. How you treat the proceeds of this investment makes it different from others. This is because PPF offers you the flexibility to reinvest the maturity amount that you earn at the prevailing interest rate.
Investment options
Your financial goals have a direct bearing on how you decide on your investments. Once you have received the maturity amount, you can consider extending the maturity amount for five more years. If you do not need the maturity amount immediately and are already earning, you can consider availing of this Extension-with-Contributions option.
Investors always love to choose what they want to do with their money. Like they would like to choose where they wish to park their savings for returns that beat inflation while availing them of the benefits of tax exemption. Similarly, they would like to exercise more options regarding the amount they receive as proceeds from the investments they have made. Unlike most investment options, PPF account holders can
Close the PPF account
You close the PPF account and credit the proceeds to your savings account without having to worry about paying taxes on the corpus amount.
Extension sans contribution
You can extend the PPF account by five or more years without worrying about having to continue your contributions to the account. The corpus amount collected in the account can be used to collect interest for all these five years.
Adhil Shetty, CEO, BankBazaar.com says, “The applicable rate of interest would be the same as the PPF interest for the year. You have the option to extend your PPF account indefinitely in blocks of five years. At 7.1 per cent returns on PPF are still on the higher side compared with small savings instruments. As interest rates rise, the returns on PPF will also increase. Moreover, as investments grow through compounding, the longer you stay invested, the better.”
Withdrawal from this account is permitted subject to the limit of only one withdrawal every year. This means that you may withdraw in small sums every year or a lump sum in one particular year while leaving the rest of the corpus to garner interest over the remaining period.
Extension with contributions
You may also continue to make the minimum contributions during the extension period. This means that apart from the corpus, you earn interest on the fresh accumulations too. However, this comes with some restrictions regarding the withdrawal limit too. For example, during those five years of your PPF account extension, you can withdraw only 60 per cent of the maturity amount accrued at the start of the extension period. Also, only one withdrawal per year is allowed.
Inform your point of purchase
It does not matter if you had opened a PPF account with a bank or a post office. Make sure that you inform the bank or post office about your choice of extension. This is important, especially, if you wish to choose the Extension-with-Contribution option.
Extending your PPF account for five years post the maturity period of 15 years seems a fair and viable option if you are investing from a long-term perspective.
Whether you want to choose the extension or not depends on your imminent money requirements and long-term financial goals. For example, if you are aged around 40 years old and have enough income to fall back upon, you may consider extending the account for five years with or without extension depending on the corpus you are looking for.
However, if you have retired, you may consider withdrawing the entire maturity amount or 60 per cent of the corpus accumulated before extending the account for another five years.
